Remember Kardex Systems?

Written By: Ron SleeArticle Date: 03-01-2005Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.
What did they have that we should use now?

Back when computers first arrived on the scene for equipment distributors, one of the first applications they were used for was inventory control. In those days, a paper parts sales order form was sent to data processing, keypunched and run through the computer to produce an edit report. The edit report was reviewed in the parts department, corrections were sent back, a final run was made on the computer and the activity was updated on the parts history file. Phew!

Today, all of that is done before a document is printed. Of course, some of you wait until the parts have been picked to release the order for the update of the history files. So why do we still have to use forecasting systems to calculate order points?

We have gone through many calculations within our inventory systems from the normal statistical calculations to Poisson statistical calculations. The truth is we can use good old-fashioned Kardex rules today. The time delay in updating order points and order quantities no longer exists. This means all of the fancy statistical methods used are no longer of benefit.

What about the use of lead times? We started with mailing stock orders to the suppliers, some of us then went to a telex, now we use satellite connections or high-speed Internet lines. So the time to submit an order to a supplier is hours, not days or weeks.

And look what has happened at the suppliers. Some suppliers allow daily stock orders, some take them several times a week and most of the rest allow weekly stock ordering. The turnaround from when the supplier receives the order until the order is received by the dealer is a matter of days for most of the dealers in the country.

So what's the net effect? Lead times can be as short as three days and are rarely, if ever, longer than two weeks.

"So what?" you say.

Well for starters, our inventory levels reflect lead times that are altogether too long. That means we carry too much inventory for the level of service that we provide to our customers. Take a two-week lead time as the average in America. The order points should be no more than a one-month supply. The order quantity should be a two-week supply.

Some of you are still saying, "So what?"

Well, your inventory turnover should be no less than nine times a year with the average around 10. That is the "so what."

Let's say you are a high-performance dealer and your parts inventory turnover is 5 and your parts gross profit is 25 percent. That means you produce a gross profit return on capital employed of 125 percent (5 times 25 percent). If your turnover improves to 10 times holding the same gross profit, your gross profit return on capital employed is now 250 percent. Have I got your attention yet?

Of course, this is meant to stimulate your thinking and get you "out of your box" regarding the standards for inventory turnover. Oh and by the way, this increase in turnover will cause no change in your off the shelf fill levels - no change at all.

Isn't that worth thinking about?

Will your current system allow you to be able to implement this change? Sure it will. Just use a "minimum divisor" or set the lead time to two weeks. Check it out. It works. It doesn't hurt service and it allows a lower investment for the same level of business.

Associated Equipment Distributors (AED) is an international trade association representing companies involved in the distribution, rental and support of equipment used in construction, mining, forestry, power generation, agriculture and industrial applications. AED member dealers are unique in that they are each authorized, via contract with an original equipment manufacturer, to inventory, sell and service new machinery in a given geography. More than 90% of AED's factory authorized dealers rent construction equipment as well. The Associated Equipment Distributors strongly adheres to and strongly advocates principles of integrity, ethics and fairness. The AED urges its members to conduct their businesses ethically and compatibly with the free enterprise system and the laws which govern it. Contractors can locate factory authorized construction equipment dealers at the MachineMart® web site.